As China has become a mature market, Apple may turn to new markets that offer high growth opportunities.
Apple is focusing on Southeast Asia and India as a precaution against the difficulties in China.
The beginning of a 10-year transition
Apple CEO Tim Cook visited the Southeast Asian countries of Vietnam, Indonesia and Singapore last week as part of a major multi-day trip to reduce Apple's dependence on China as its main manufacturing hub, Yahoofinance's Daniel Howley reports.
While Apple has no intention of abandoning China, the company is taking precautions against the potential for future production barriers in the region. At the same time, the company is slowly setting its sights on India as the next big growth opportunity as China becomes a more mature smartphone market.
"Apple is at the beginning of a decade-long transition away from dependence on China and diversifying into other countries in Southeast Asia, both on the manufacturing front and on the demand front," says Gene Munster, Managing Partner at Deepwater Asset Management. However, it may take some time for Apple to reduce its dependence on China for device production and increase its market share.
Manufacturing growth beyond China
China accounts for the bulk of Apple's supply chain partners, such as Foxconn and Pegatron. The concentration of manufacturing capacity in one area was particularly damaging during the pandemic, when China forced factories to close, limiting Apple's ability to manufacture and ship devices.
Once capacity came back online, Apple was able to meet consumer demand again, but the fact that the factory closure had such an impact on the company is a troubling sign of supply chain fragility.
Wamsi Mohan, an analyst at BofA Securities, said: "Apple said in its latest balance sheet announcement that they generated about $5 billion in recurring revenue. That's equivalent to the cost to the company of shutting down a plant in China," says Wamsi Mohan, an analyst at BofA Securities.
Unless things improve, the lack of supply chain flexibility threatens to bite Apple again, given the bleak state of US-China relations and the tit-for-tat maneuvering the countries are doing with their respective tech companies. While the US is trying to block Huawei's access to high-end processors and trying to get ByteDance to sell TikTok, China is reportedly demanding that government employees abandon devices made by Western companies.
"We're seeing Cupertino (Apple's headquarters in California) aggressively go after Southeast Asian countries on the supply front," said Wedbush analyst Dan Ives. Cook is hedging his bets as China remains a highly risky situation for Apple, while Vietnam and Indonesia offer weak landing spots for iPhone production," writes Dan Ives.
Apple's problems in China extend beyond manufacturing complexity. The company is also struggling with economic growth issues and slowing iPhone sales in the region as regional rivals capture market share.
China is Apple's third largest market in terms of revenue, behind the US and Europe. But iPhone sales in the region are slowing. Apple reported that its revenue in China fell 13 percent in the first quarter compared to the previous year, which follows a 2 percent decline seen in all of 2023. Apple had previously reported 9 percent growth in the region in 2022.
China is also known as a relatively mature smartphone market, making big growth gains a difficult endeavor, which is where India comes in.
China is next: India
India, the world's most populous country, has a growing middle class that could be a boon for Apple. "China probably took five years to become really important. India probably needs 10 years, and that's because they have the population on their side, but the GDP per capita in India is about a quarter of China's. And in general, people in India don't have the same wealth as in China."
Apple opened its first official store in India last year and Cook himself kicked off the celebrations in Mumbai. Apple also manufactures some of the latest iPhones there, making it even more important to the company.
Emerging markets like India are likely to play a key role in Apple's growth in the coming years as larger markets continue to mature and growth declines. The company seems to be making this idea explicit.
